Market Watch

A World of Value

April 4: Measures of value based upon current or prospective multiples suggest the equity asset class remains attractively priced. Indeed, a higher than normal multiple might be justified, given the currently low interest rates and volatility, and high profitability. The Global Shiller price/earnings ratio is about 12% below its past average. With embedded risk premium and implied growth-rate calculations also suggesting stocks are attractively valued, and what are perceived to be low-risk stocks within the market also commanding a large premium, we continue to regard global equities as attractively priced and not fully reflective of current fundamentals. -- Ian Scott

The Wall

April 4: When charts look as they look now, it is difficult to say where and when the markets will retreat, and it is also difficult to say how far that retreat will take this market.... Should the Standard & Poor's 500 June futures trade below 1241.25, the weak longs will become scared, and sell. Right now, with interest rates hovering at negative returns, it makes no sense to hide in the bond market. Further, the value of the dollar is declining, and that is hurting its buying power. We feel the pressure at the grocery store, at the gas station, on utility bills and in real-estate tax increas[es]. Yet our products are cheaper for export, and, therefore, our balance of trade should be positively affected. -- Jeanette Schwarz Young

Navigating the Unforeseeable

April 4: The most affected areas of the [Japanese] economy include energy, banking, insurance, and tourism....

Analysts estimate that 10% to 20% of the damage will be borne by private insurers and reinsurers.

In the long term, we would expect some stimulus to come from the rebuilding effort, with counteracting weakness coming from the slowdown to the directly affected geographic areas via plant closures and supply-chain disruptions.

Estimates on the overall impact to Japanese gross domestic product range from a decline of 0.2% to upward of 1%. Again, it is too early to tell, but the results ultimately should be less than devastating to the overall economy.

In the wake of prior natural disasters—like the Japanese Kobe earthquake in 1995, or Chernobyl in 1986—equity markets suffered sharp declines (also near 20%), but rebounded materially within a year. Hence, we don't recommend any distressed selling at this point, but vigilance. Should the situation at the Fukushima Daiichi nuclear plant worsen to complete nuclear meltdown, the impact on Japan's infrastructure, ecosystems, and exports would be more profound. -- Ryan Dembinsky

Narrowing Margins

April 4: The Labor Department's [recent] jobs reports, combined with the rosier gauge on small-business hiring, compliments of ADP, [still stand]. Note, however, that the underemployment rate, or U-6, is sitting at 15.7%, and clearly there are structural issues for those deciding to refrain from jumping back into the labor pool.

For the time being, the market's attention is on job creation, and what that means for the animal spirits of stocks once the Federal Reserve concludes its bond-buying program, in June. That being said, I sense a greater emphasis by market-goers on the eventual exit of the Fed, and the correlation that will have with the direction of risk assets, chiefly equities.

[This] is a shift in mindset from riding the Fed carousel...(pumping cash) since the March 2009 lows, to the real possibility for a correction in stocks (perhaps 8% to 10%). This is of the utmost importance, as profit margins for companies decelerate, broadly speaking, due to cost inflation....

There will be sectors that have margin contraction in 2011; one such is consumer-discretionary, which is battling up-and-down spending by consumers and higher costs of production—from labor in China to cotton coming from the fields.

Careful stock selection is vital in this type of margin environment, as the benefits from the initial stages of economic recovery, which essentially lifts the ships of all parties, transitions to a mature expansionary phase, where winners and losers will be more obvious. -- Brian Sozzi

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